Savants in the Levant

Tuesday, January 26, 2016

This morning it was announced that Sony Semiconductor has agreed to acquire Altair Semiconductor for $212M, the first acquisition for the Japanese company in Israel. Altair was founded in 2005 to develop fourth generation mobile silicon and I had the pleasure of working with the team ever since the $12M Series A financing. Altair began at a time when there was no clear path for 4G cellular and competing standards jockeying for mindshare. The market for the next generation of mobile would be much larger than 3G because it would encompass broadband services far beyond cellular phones and penetrate emerging and developed markets in parallel. To remind you, this was a time when Intel was investing billions of dollars in WiMax in emerging markets, when Nokia was an iconic consumer brand and when Europe’s early adoption of technology standards would dictate the direction of the global market. Altair had developed a low-power, software-defined radio platform, which would allow it to easily develop a chip for any wireless standard using a common architecture, and even a single chip that could support multiple standards simultaneously. The name "Altair" could have been a reference to one of the first micro computers,the Altair 8800, but in Hebrew “le’altair” is to improvise, an apt description of any startup experience, but very relevant for a uniquely flexible hardware product like a chip. Looking at the news today, many of the words I read describing the acquisition were not even part of our lexicon ten years ago. Back then IOT was merely a typo and “wearables” could be confused with mundane fashion accessories like belts, cuff links and scarfs. The LTE standard was far from being crowned,and at the time was pushed by Ericsson and hindered by that company from San Diego. Except for Qualcomm, the landscape of competitors and acquirers of a baseband semiconductor company like Altair completely changed, with Broadcom ignobly exiting after pouring billions of dollars into acquisitions and R&D, and Infineon, ST Micro, Renasas and others merging at the behest of government just to preserve jobs at home. As of yesterday, Altair was one of only two companies to remain independent through this dynamic period, a testament to the longevity of their underlying technology and the consistent execution of a little company from Hod Hasharon.How does a company navigate such a complex landscape over a decade? Foremost, is with an incredibly scrappy and persevering founding team of three (Oded, Yigal and Eran) and key members of management (Nohik, Eli, Chee and Shlomit) who stayed together and committed throughout. Altair also has more than 200 incredible employees responsible for developing, selling and shipping millions of chips to customers around the globe. Amazingly, despite the changes in the market, product and customer set, Altair experienced what is arguably one of the lowest employee turnover rates in the history of startups. Literally no one ever left willingly. And believe me that Apple, Intel and others tried.

However, as everyone knows leadership starts at the top and only then trickles down to the lower levels of the organization. Oded Melamed is an incredible entrepreneur, leader and friend. As an entrepreneur, he was focused, confident, tireless, innovative and diligent. He led through example and gave customers and investors alike the confidence that he would deliver on time, on budget and on spec. And he did it time and time again. But the only way an investor can work with an entrepreneur more than a decade is for there to be a great person underneath that scrappy, entrepreneur garb. As a person, Oded is a humble, practical, selfless mensch. One more concerned with the well being of his co-founders, employees and shareholders than his own pocket or ego. So I take liberty now in lauding one of my favorite entrepreneurs. The hardest part of selling a company is the abrupt halt to the regular conversation and strategizing that was so engaging and stimulating. After speaking to Oded every week for more than 10 years I will miss working with him. On the flip side, we can now grab a beer and not let work dominate the conversation. I look forward to the next opportunity to work with Oded and team, but in the meantime good luck with Sony and sharing with them the secrets of entrepreneurial leadership and improvisation.

Friday, February 27, 2015

By default Google Maps still shows us the way to get from Tel Aviv to Istanbul is to drive through neighboring Syria and Iraq. Algorithms are ignorant of the grim geopolitical reality that restricts our travel options from Israel. But the peculiar case of the permanently delayed flight from TLV to SFO is neither the result of a computer glitch nor an aeronautical limitation, but an invisible man-made barrier erected by neglect and maintained by ignorance. It undermines Israeli high tech and is a national embarrassment for a country that is the clear number two to Silicon Valley in high tech innovation.

We Israelis seem to have accepted the current situation as yet another imposition we can live with. After all, a simple query on Kayak demonstrates that there are many other ways of flying to SFO via NY, London, Frankfurt, Paris, Dublin, Amsterdam, Toronto, Dubai etc. But this just proves the point that TLV’s situation is an outrageous anomaly for an otherwise very connected country. Other major cities wait patiently for their own high tech economies to take off, while their national airlines are already prepared with daily flights in and out of SFO.

Not so in Israel, where our strong ties to the Valley thrive despite the lack of direct flight options. Migrant Israeli travelers we are forced to choose between connection anxiety and layovers long enough to gain permanent residency; between sleepless “redeyes” and abandoning meetings midway to catch the only flight back in time to catch the connection to TLV. As a result, many Israelis spend as much time traveling as they do visiting their Silicon Valley destination, making relocation a common remedy.

But this still just sounds like a minor inconvenience for the privileged few and therefore yet another grievance from an ungrateful citizen of a country with many other economic priorities. While there are more pressing issues, not so in the high tech sector of which the country is so proud. The TLV to SFO delay hurts Israeli high tech in more ways than we think.

If we want Silicon Valley to come to Israel, we should pave the path. Israel literally pays foreigner multinationals and investors to set up shop in Israel through tax incentives and grants, and for good reason as foreign direct investment is a boon to the economy. But we underestimate the shock Silicon Valley executives get when their secretaries inform them they will have to fly via Heathrow or Newark, and that they can’t use Emirates. They are impressed when it dawns on them that those Israelis have been doing the same trek month after month for years, but then reality sets in. Why would a Silicon Valley CEO want to establish an Israeli subsidiary when there are no direct flights? Which of their execs can free up the time to fly out there regularly? They have to want it really badly, which puts Israel high tech at a permanent disadvantage when other options are available.

Conversely, the indirect flight paths have a direct affect the willingness of Israelis entrepreneurs to move to the Valley versus the East Coast. Israeli startups do themselves a disserve not starting their US office in the Valley as it keeps them away from the center of high tech activity with all its repercussions. While some Israeli entrepreneurs choose NY or Boston over the Valley because of a sector specialty, the extra travel distance is the determining factor for everyone else still choosing the frigid East Coast over sunny Silicon Valley. Entrepreneurs simply can’t stomach the idea of flying back and forth between their Israeli and Silicon Valley offices. Ironically, successful Israeli companies headquartered in NY and Boston have had a major part in keeping those regions still relevant in an age when everything else in high tech has consolidated in the Valley. And to avoid any confusion, while NY is still the finance capital of the world, most tech analysts and bankers covering everything from Internet to semiconductors moved to Silicon Valley over a decade ago.

If there was ever a capitalist justification for government intervention in the private market, the establishment of a line linking Israel to the center of the high tech world would be it. Although it probably wouldn’t need to, the government could even subsidize a TLV SFO line to get it off the ground. I know it’s complicated with airport landing rights, game theory between competing carriers and keeping all lines profitable, but the government props up countless unviable high tech companies via the Chief Scientist. And surely we can find more than a few precedents for the Ministry of Transportation subsidizing strategically important, yet unprofitable roads, tunnels and bridges. TLV SFO is a national economic priority with a fairly immediate ROI. ->

As I write this missive conveniently during my layover in Heathrow Terminal 5, I am reminded of the fact that overwhelming economic considerations eventually helped China overcome the politically unthinkable and establish a direct flight linking Shanghai and Taipei despite the lack of formal diplomatic ties. The economics are on our side and the politics are non-existent, so it may just be a matter of time. But I hope it happens soon because eventually one of those European capital cities with direct flights to SFO will realize the advantage they offer Silicon Valley companies and steal the attention.

Coincidentally, my colleague, Amit Karp, published a great post on the importance of being local, which you can read here. Also, please sign the Petition if you haven't already. http://sfotlv.org/

Sunday, May 5, 2013

When considering their next career move, aspiring
entrepreneurs generally follow conventional wisdom and start a company. Similarly,
most serial entrepreneurs who were unsuccessful in their first attempt to build
a business or reach an exit also make the same decision. They simply pick up
and start another company, instinctively becoming a career entrepreneur without
much distraction. Such persistence, determination and independence are
admirable traits, necessary for success as an entrepreneur. However, contrary
to popular belief,entrepreneurial individuals do not need to be founders
throughout their careers in order to create amazing products or have
outsized impacts on companies.

Lately, I find myself pitching and persuading both
experienced and first-time entrepreneurs to abandon their project/idea and join
an exciting startup already on the path to success… and help make it an even
bigger success. Conversely, I find myself cheering for my portfolio companies
that make a concerted effort to seek out fellow entrepreneurs as they expand
their executive teams. This “entre-hire” trend is just as exciting as the now
celebrated “aqui-hire” M&A trend. I have seen too many startups fail to realize
their potential because they lost their entrepreneurial edge as they surrounded
themselves with minions or corporate execs. There may be such a thing as “too
many startups,” but never “too many entrepreneurs” if their talent is properly
harnessed by the surrounding ecosystem. Startups always need entrepreneurs.

While there is no substitute for starting your own company,
I strongly believe that entrepreneurs are more likely to be successful when
they have previously held pivotal positions in successful startups, something
often lacking in first-time entrepreneurs. There is something about experiencing
a company struggle, grow and succeed from the inside that prepares a future entrepreneur unlike anything else. Although
there is no such thing as a school for entrepreneurs, working in a successful startup
is as close as one can get to a startup education.

With so many successful startups in our midst, I am curious
to know why larger numbers of entrepreneurial minds don’t pad their resumes with
interesting positions at more established startups known to be success stories
in the making. While these startups may
appear to be past their innovation prime, the reality is often quite different.
Many startups use their initial success to rapidly expand their product
portfolio and business in multiple directions. These startups are acutely aware
that initial success can be a source of complacency, a danger to any high tech
company, and are therefore looking for fresh entrepreneurial blood to inspire,
lead and execute. Obviously, this is a proverbial “two-way street.” Startups
benefit from hiring new entrepreneurial talent as much as those very
entrepreneurs do from working – and learning – at an established, successful startup.

I can’t but comment on the so-called “PayPal Mafia,” the
group of independent entrepreneurs who emerged from PayPal after its sale to
eBay. PayPal’s incredible legacy as a successful startup is not solely defined
by its thriving business as a unit of eBay, but also by the numerous successful
startups that it ultimately spawned. Former executives and employees at PayPal
went on to found LinkedIn (LNKD), Yelp (YELP), Slide (Google), Tesla (TSLA),
Yammer (Microsoft), Geni (MyHeritage), and
YouTube (Google), among others (incidentally, BVP is an investor in LinkedIn,
Yelp and Geni, the latter through MyHeritage). One can only imagine how
difficult it must have been to build an organization overflowing with so much raw
entrepreneurial talent! But that’s the point. Building a scalable startup that
can continue to grow at a breakneck pace requires periodic infusions of both capital
and entrepreneurial talent.

As much as entrepreneurs should aspire to match PayPal’s
success as a business, they should also dream of spawning the next generation
of successful entrepreneurs, even if it means reluctantly supporting employees
that leave to start their own companies. Successful founder CEOs should work to
continually deepen the management bench with outstanding people. While many
roles in a startup require considerable functional and domain expertise, there
should also be room for more creative and versatile individuals capable of
thinking out of the box and knocking down walls. In short, startups should make
an effort to recruit and accommodate former entrepreneurs and aspiring
entrepreneurs. It is no easy task to recruit a fellow entrepreneur looking for
independence, influence and due reward upon success, but it must be attempted
repeatedly until successful. The ideal stage for such recruiting entrepreneurs is
when the first product has proven successful and there is a need to start work
on additional products and/or business channels.

One particular company in my portfolio stands out as a role
model. While it is not yet obvious to the outside observer, Wix has made a conscious effort to recruit,
empower and retain super talented entrepreneurs that would have otherwise
created companies of their own. At last count, there are at least 7 former
entrepreneurs leading various products and projects at Wix. Two additional
portfolio companies of mine embracing this hiring trend are Fiverr and MyHeritage, both of which have hired
former entrepreneurs into their most senior executive positions.

This is not just an international trend nor a practice
unique to consumer Internet companies, but a hiring strategy we are witnessing
across our US portfolio and across industry sectors. Other
BVP portfolio companies that have successfully recruited entrepreneurs are SendGrid, Simply Measured and 42Floors. We know this trend is also common
among Y-Combinator companies, where stronger startups in the incubator often
gobble up talented entrepreneurs from other companies in the class. I suppose
that’s reason enough to apply to Y-Combinator.

It’s too early to identify where the next PayPal Mafia will
emerge from, but I have little doubt it will be in a company that is willing to
take the risk in recruiting entrepreneurial talent long after its founding. As
for aspiring entrepreneurs, whether or not you have raised seed capital: consider
going to school by seeking successful startups willing to give you the space to
make an impact.

Wednesday, October 31, 2012

In response to popular demand, I am uploading the keynote presentation of my partner, Felda Hardymon, that was given at E&Y's Journey 2012 high tech conference. The presentation contains some fascinating observations on the state of venture capital.

Monday, October 29, 2012

The proverbial “billion dollar company” seems out of reach
for many Israeli start-ups, but may just require a different way of thinking
about innovation and scaling. I learn a lot of Israeli start-ups and venture
investing by observing my American colleagues and of course by studying
successful American start-ups, whether or not they are in the BVP portfolio.
While many American start-up ideas, particularly in the SaaS and Internet
domains, could never have been started and properly executed from Israel,
occasionally I come across a company that should have been founded in
Israel.

One such example is Ubiquiti Networks (UBNT), founded in
2005 in the apartment of a 26 year-old wireless engineer from Apple, Robert
Pera. Ubiquiti has no Israeli connection, but it offers some fantastic lessons
for the Israeli entrepreneurial community because of their domain and
go-to-market strategy. Ubiquiti operates in fixed wireless broadband, arguably
one of least sexy market segments today due to cut throat competition and
struggling customers (but one familiar to many Israelis).

To start off, Ubiquiti didn’t aim to provide the best
wireless product, but to create a wireless product that would allow wireless
ISPs (WISPs) to better compete with wireline
competitors. Ubiquiti realized that its customers’ businesses were failing
precisely because existing wireless gear and was too expensive (product cost
including costs of service, customization, support, etc.). And so Ubiquiti set
out to take over a billion-dollar market by solving this key issue of cost
essentially throwing a lifeline to the vanishing WISP.

Ubiquiti’s disruption to the market came from the fact that
it was to sell its wireless ‘kit’ for less than 1/10th the
competition without a significant tradeoff in quality and performance. They
were able to do this with a unique development and business development model
that lowered their own cost structure, which they then passed on to the
customer. This not only includes the cost of goods sold, but cost of
manufacturing, marketing, selling and supporting that product.

Ubiquiti didn’t hire any salespeople and directed everyone
to their website and where they could easily find local distributors around the
globe. Ubiquiti didn’t have a support organization, and instead directed all
customers to a detailed online forum which now has 334K posts from 142K
members! It helps when your customers don’t really compete with one another and
will gladly help, advise and recommend products to one other. And because the
product was so cheap and the customers themselves installed and maintained it,
there was no need to sell or charge for expensive warranties.

Eliminating most SG&A costs from their model was a
radical approach for a telecom equipment company like Ubiquiti, but one that
fit very well with their WISP customer base, where the cost of base station and
CPE equipment determined whether they had a viable business model or not. The
resulting hyper efficient sales model is far more innovative and sustainable
than the typical technology advantage that a start-up introduces to the world.
That’s not to say there is little technology in their products, because there
is. They relied on software to innovate, preferring to ride the downward cost
curve of hardware commoditization. Even Chinese vendors have a hard time
innovating price reduction like this and several companies had to resort
to theft to compete.

Since it’s founding, Ubiquiti has generated over $100M in
profits and will soon pass $100M in quarterly revenues. For a communications
equipment company to grow this quickly, while maintaining operating margins of
35% is remarkable.

Moreover, Ubiquiti never raised external money until it
raised a $100M private round in 2010. Ubiquiti has since moved into adjacent
markets, like enterprise WLAN, surveillance camera, microwave and routers with
a similar approach of bargain prices and customer self reliance. So expect more
disruption from these guys, and new competition for several Israeli wireless
leaders.

To put this story in some perspective for the Israeli
audience, in 2005, Israel-based Alvarion was a market leader in fixed broadband
wireless and approached a billion dollar market cap.A mere seven years later, it is Ubiquiti with
the billion dollar market cap; and Alvarion is worth $25M, slightly less than
its cash position. As for other wireless equipment players, Nokia Siemens
Networks is falling apart, Motorola has been gutted, and you can buy both Proxim
and Airspan in a package deal for $1M.

Ubiquiti proves that fantastic outcomes
can emerge from any sector, and that technology is not the only source
innovation. Ubiquiti might be a wireless equipment company, but its
thoughtful strategy provides lessons for all technology companies:

1.There is NO long term advantage in technology
innovation that doesn’t result in a superior business model

2.Embrace the weakness of your competition, by
leveraging hardware commoditization and reducing if not eliminating the need
for expensive post-sales operations and support

3.Listening to your customers is more important
than talking to them. Leverage the Internet for marketing, sales, support and
customer feedback (product definition).

Although Ubiquiti was not a BVP portfolio company, it represents
the kind of innovative, software centric telecom we are fond of. BVP has
invested in four telecom companies over the past few years, each one attempting
to best its competition with a software technology that supports a superior and more
capital efficient business model, including Axis Network Technology (acquired
by Ace Technology), Traffix Systems
(acquired by F5 Networks), Intucell Systems and Vasona Networks. I look forward to finding and funding the Israeli Ubiquiti in the years to come.

Sunday, November 20, 2011

In baseball, players often slide into the base in order to
avoid being tagged out, but almost never slide into first base. The reason no
one ever slides into first is not because it’s illegal, but because it slows
down your momentum if you want the option of running onto the next base. A lot
of Israeli high tech companies unwisely “slide into first,” yearning for safety
and calm after years of uncertainty and hard work, but inadvertently end up
losing the precious momentum necessary for continued growth. With fewer late
stage companies generating the kind of momentum and scale that late stage investors
look for, it is little surprise that Israel has an underdeveloped growth
financing market relative to the US. Maintaining
the growth momentum is how big companies are created, and is arguably one of
the biggest challenges now facing Israeli high-tech.

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The thoughts and opinions expressed herein belong to the author and do not necessarily reflect those of Bessemer Venture Partners or any of its affiliates (“Bessemer”). The material here is written on the author’s own time for [his/her] own reasons and Bessemer has not reviewed or approved the information herein. Any discussion of topics related to Bessemer or its investment activities should not be construed as an official comment of Bessemer.